Slow Roll Drum Co. is evaluating the extension of credit to a new group of custo

Question

Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $16,200 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 34 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 120 days.

Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.)

Should credit be extended to the new group of customers? Yes or No

Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.)

Should credit be extended to the new group of customers? Yes or No

Explanation / Answer

Hi,

The correct answer is as follows;

Incremental investment = $(16200+0.72*180000)

$145800

Return = $180000*(1-0.12)*(1-0.34)-145800

-41256

since, he is getting a loss, he should not invest

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